Wednesday, May 9, 2012

Perfect: US TPP Negotiating Positions Getting Bogged Down by a Product We Don't Even Make Anymore

I've expressed more than a little skepticism about the Obama administration's ambitious plan to complete the Trans-Pacific Partnership by the end of the year. My concerns relate more to systemic issues (e.g., the lack of a consensus view on the framework for market access schedules), rather than product-specific ones. But maybe I should start sweating the latter as much as, or more than, the former. It seems that a minor war has broken out over - no joke - US tariffs on footwear. Here's Businessweek with some details:

The Footwear Distributors and Retailers of America, which wants an end to the trade barriers, says tariffs for some types of shoes can run as high as 67.5 percent, and when the costs get passed on, they effectively triple the price of foreign-made shoes. New Balance, based in Boston, says the duties that help sustain its U.S. athletic footwear production are as high as 20 percent and asks that they be preserved.

The 7 million pairs of shoes New Balance produces each year in the U.S. make up only a quarter of U.S. sales, says Matthew LeBretton, director of public affairs. The rest are made in the U.K., China, Indonesia, and Vietnam. “If this is purely a business decision, then it’s very clear that you make more profit by making shoes in Asia than in the United States,” LeBretton says. “We aren’t purists, but we are doing this for reasons that are other than financial impact. It’s the right thing for us to do. We suffer as a country when we lose the ability to manufacture.” He adds that producing in the U.S. lets New Balance react faster to demand from U.S. stores and helps those stores maintain lower inventory. The company also says local workers maintain better quality control than workers abroad.

Keeping the tariffs is important because most of New Balance’s jobs are in communities where there are few other options for employment, says Senator Olympia Snowe (R-Me.). “They’re paying 46¢ an hour in Vietnam, and New Balance is paying $10 an hour here, plus all the benefits,” Snowe says. “It’s not a level playing field. Our government has to finally wake up and understand that.”

Nike has supporters, too. “I really believe that the government should not negotiate agreements for one company,” says Matt Priest, president of the footwear distributors association. Representative Earl Blumenauer (D-Ore.), whose district is home to Nike employees and the U.S. headquarters of Adidas (ADS), says keeping the tariffs taxes millions of consumers to keep a few thousand jobs.

Trade talks will continue this month. Maine lawmakers are applying pressure on the administration to keep cuts in athletic footwear tariffs out of any final agreement. The U.S. hasn’t made any decision, says Carol Guthrie, a spokeswoman for Ron Kirk, the U.S. Trade Representative, in an e-mail. “Footwear is an area of interest for Vietnam and remains a sensitive item for the U.S.,” Guthrie says. “The challenge we will face is how to address this product, and we continue to consult with Congress and stakeholders on how to do so.”

Greg Rushford adds in a recent op-ed for the Wall Street Journal Asia that this is not just a fight between protectionist New Balance and free trade Nike/Adidas for a tiny slice of the TPP. In fact, this skirmish is affecting the entirety of the TPP negotiations; thus, there are a lot of other US companies also hoping that the Obama administration stops shilling for New Balance in order to save the struggling agreement:

The White House is demanding TPP partners, chiefly Vietnam, agree to new rules that would bring transparency and market-oriented efficiencies to their inefficient (and often corrupt) state-owned enterprises. SOEs are indeed a drag on Vietnam, comprising around 38% of the economy. Prime Minister Nguyen Tan Dung has struggled with the problem for years with little result.

Though the U.S. is pushing Vietnam to help itself by reforming SOEs, Hanoi wants something in return. The country is America's second-largest supplier of clothing, and Mr. Dung's trade negotiators insist the U.S. get rid of high tariffs on clothing and footwear, which generally range from 18% to 36%.

This is a chance for Mr. Obama to live in a "21st century economy," as he often says. Unfortunately, he seems to be caught in 18th century mercantilism.

The American president is in tight with the U.S. textile lobby, which supported him in 2008. The industry has benefited from high tariffs and various protectionist schemes since the 1700s. So U.S. trade negotiators have taken a hard line against liberalizing the U.S. rag trade. The Vietnamese know a double standard when they see one, and are incensed. No deal on market access for us, no deal on SOEs, they say.

Here's how the debate plays out in Washington. On the "21st century" side are the mainstays of the American economy. Giants like Boeing, General Electric, Intel, Microsoft, New York Life, Citi and Federal Express strongly support a TPP that would write new competition and transparency rules for Asian government-run corporations. Opposing the TPP deal is one shoe manufacturer in New England that employs about 1,200 Americans, New Balance Athletic Shoe, and a handful of mid-sized textile manufacturers in the American south.

The giants of American manufacturing and finance, which have major offshore operations, can't get serious consideration from this White House. Mr. Obama—the "Buy American" candidate—stands behind any company like New Balance that vows to keep jobs at home.

So, there we have it: New Balance (and Maine's uber-protectionist champions in Congress) versus the world, and the fate of the TPP could hang in the balance. Fantastic.

Now, for the moment, I'm going to ignore the economic falsehoods spewed by LeBretton and Sen. Snowe about the state of US manufacturing or the idea that developing country labor costs are some sort of unfair game-ender for US manufacturers. Instead, I just want to focus on the idea that New Balance actually still makes a lot of shoes in the United States (and thus that their fight is really about valiantly protecting US shoe manufacturing, regardless of how dumb the economics are). The Businessweek article seems to indicate that tons of New Balance shoes are still made here and thus hang in the, umm, balance, but Rushford spills the beans:

[B]ehind the pro-American propaganda is a harder economic truth. New Balance makes 75% of its shoes in places like Indonesia and China, even some in Vietnam. The remaining 25% come from the New England factories. But most of those sneakers aren't really "Made in America," but "Made in the U.S.A. of Imported and Domestic Components," as the technical label reads. To be the former, at least 70% of the sneakers must be made from components sourced domestically. Company officials declined to comment or provide a detailed breakdown of their Asian-made components.

This much is clear: New Balance imports shoe parts from Asia and then has their American workers glue the shoes together. Without imported components, the American workforce couldn't make shoes at a competitive price.

Why is New Balance against giving Hanoi trade concessions? Its operations in Vietnam are tiny compared to elsewhere in Asia. But tariff cuts would give a big boost to its competitors, Adidas and Nike, which have significant footprints in Vietnam.

The company's patriotism feels even flatter if you consider Nike and Adidas, which unashamedly manufacture their footwear in Asia, together employ some 27,000 Americans. This highly paid workforce in marketing, logistics, design and advertising is 22 times New Balance's American presence.

In New Balance's defense (sorta), Rushford's oped also makes clear that the Obama administration isn't sandbagging the TPP negotiations only for shoes - southern textile manufacturers and their heavily-unionized workers are also getting in on the action (and I hear sugar's getting an, ahem, sweet, deal too). Nevertheless, both articles above firmly establish that TPP is struggling, in part at least, because of the White House's staunch, politically-motivated defense of archaic tariffs on a product that isn't even "made in the USA" anymore.

Unreal.

Word on the street is that Canada's enthusiasm for joining the TPP negotiations may be waning, and that the US ally and major global player might be looking elsewhere for a trade deal. If so, that would be a huge loss for the TPP.